Trade Vringo Profitably

Vringo (NASDAQ:VRNG) is a software company focused on patent lawsuits. It won money from Google (NASDAQ:GOOG), but the total amount is unclear.

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Vringo stock has displayed mean reverting characteristics in recent months. However, I expect the stock could break its range dramatically in quarters ahead. Leading hedge fund Citadel may share this view as it bought volatility last quarter instead of shares. Here are several catalysts which could spike Vringo's volatility beyond historical variance.

1) Math Error

The potential existence of a math error by jury members is the primary driver of sentiment for bulls publicly expressing opinions on Vringo. Many believe that the total winnings number as implied by the Jury should be corrected five to tenfold in favor of Vringo.

The Google verdict revenue was built with approximately two years of labor, although the actual timeline is longer. This situation would in average conditions imply a 4-6x winnings multiple for Vringo's total valuation as a company.

Multiples often skew towards historical sales performance. If Vringo won a small amount from Google, this implies a smaller multiple. If Vringo won a large amount from Google, this implies a larger multiple due to the potential for repeated success in future litigation.

Without this skew, let's say that one would multiply the winnings by 5 to arrive at an enterprise valuation. So, for example, if Vringo won $500 million, Vringo might be worth $2.5 billion.

With skew on such an upwardly adjusted verdict, one could see a multiple closer to 8, or a valuation of $4 billion, which is a return on share price over ten times current levels.

Currently the market appears to have assumed that Vringo won around $100 million. But optionality for a multi-billion-dollar market cap is also baked into the share price. Thus, the confirmation of no math error would be a negative catalyst for Vringo, which would skew its multiple on winnings downward. Although, this negativity from the removal of optionality would be far less dramatic than the runup (if Vringo actually won half a billion dollars as revealed by the math error).

Here is my personal opinion: assuming there is a 10x downward adjustment evident in the Jury's numbers, it is not a math error. It is a heterogeneous group of individuals' arbitrary base-10-system numerical attempt at equitability and compromise between the persuasive arguments made by both litigation teams. This is similar to a "quotient verdict" and has strong roots in human psychology.

2) USPTO Reexamination

Patent law insider Daniel Ravicher recently profiled a delay tactic used by Google in post-judgment filings. He cited this tactic as evidence that Vringo won more than just a $31 million lump sum. However, the reason for Google's delay tactic was left unexplored in Ravicher's article. Many believe that Google is stalling while Vringo's patents are potentially invalidated by the Trademark Office.

Google is unlikely to settle until hearing from the USPTO, as the symbolic victory of invalidation means far more than paying a few tens of millions extra to Vringo. In other words, if saving money on this case was a priority for Google, Vringo would have a better chance of securing a settlement. However, as I have explained, the symbolic victory of deflated patent currency is beneficial to Google's "short IP" business model.

3)CLS Bank v. Alice

In early December, Google published an Amici note in a software patent appeal CLS Bank v. Alice. The document, which references Mayo v. Prometheus 24 times, expresses concerns about the patent eligibility of abstract, common goals rather than worthwhile inventions. If this appeals judgment is decided in Google and friends' favor, it is materially negative for Vringo's prospects on a Google appeal, assuming Vringo survives PTO reexamination.

4) Telecom Patents

Vringo has acquired patents which may be more defensible than the search engine patents. This has not been explored much in public discussion because the Google trial has taken temporal precedence. However, telecom is a wildcard which could burn through cash or generate a windfall.

Similarly, Vringo could string up an entirely new line of business for patent trolling. However, until Vringo delivers on its earlier "promises", new promises are less likely to move the share price. Also, Vringo may appeal laches but I extremely doubt they will win.

Conclusion

This is not an exhaustive list, however it demonstrates Vringo's catalytic potential for volatility beyond historic levels. This implies that investors should buy shares high and sell low relative to historic range. As Ravicher has pointed out, price targets will change as new information surfaces. The range will widen. Exercise caution trading a broken range.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: While Modernist has no plans to initiate any positions, plans can change in rare occasions. Family, friends, associates, and/or acquaintances of Modernist may or may not have positions related directly or indirectly to the contents of this article. Modernist may have unnamed positions related indirectly to the contents of this article.This article, like every article written by Modernist, does not constitute advice. The unexpected can and does happen in the stock market. Please utilize independent judgement in investment decisions.

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